I'm sure we've all been victim to this at one time or another (or, indeed, been behind the tactic at one time or another). My time for this has come - a large number of the routes I fly (mostly the ones leaving Wellington, but also a couple from Auckland) are under attack from the flooding tactic.
When I say flooding tactic, I am describing the highly competitive move where an airline will flood the market with high frequency, low cost fares. As an example, one of my competitors flooded a route with 20 or so flights priced at around 20 or so Euros, when most of the competitors prices were around the 70-100 Euro mark. Naturally, our loadfactors dropped like a stone and I found that I began to lose money on this route (and others where the same tactic had been employed), due to 0% or as high as 6% loadfactor. Needless to say, this p****d me off.
So I responded. I increased frequency as high as I could by purchasing a plane and leasing in several more. Then I dropped my prices to be around 5 Euros lower than the lowest price. This seemed to work, as it gave me 100% loadfactor and I was still making money.
But then the very next day (real time), the flooder had responded with a price around 1 Euro lower than or a price that matched mine. Usually, most of the competition had done the same thing, except for a couple of airlines that either don't play anymore, or don't care.
Things went round in circles like this for a bit, and as far as I can see, they will keep going around in circles. We'll all be dropping prices to try and keep our loadfactors at a sane level where we can make a profit, and the flooder will probably move onto other markets and routes where we all compete and flood them out too. The only place I see this price war going is the wonderful, fabled land of the 1 Euro fare.
Together, through all this price dropping and market flooding, we've shaved one hundred thousand (100, 000) Euros off of my DOP, forced me to lower prices to around a third of what they were before, and forced me to purchase and lease aircraft I didn't want to purchase and lease, just so I could stay in the black.
I think though, that the flooder didn't suspect we'd all react quite so fast, and quite so well. I don't think that he'd planned to have competitors reacting to the flooding tactic by flooding the market themselves and lowering prices to (relatively) insane levels. I'm not sure if he's thought it through enough - because the way I see it, there is only the 1 Euro fare territory to go into next, and I'm not sure that he or anyone else wants to get into the 1 Euro fare territory. Especially given that for us, 1 Euro fares would be barely profitable, and in many cases, not profitable at all.
Although I'd really rather not go into the 1 Euro fare war, I will. And I'll fight it to the death, as well. I'm happy (although I'm not actually happy to) to go into the realms of losing money on some of my routes if it means it shuts this guy up and makes him realise what a ridiculous thing he's doing.
As an aside, I don't really see the point to what he's doing - my research showed that we all had 95%+ loadfactor on all our routes before he engaged in the flooding tactic. My research also showed that our prices were pretty high - around 3 times as high as they are in real life here (and in real life, we have a monopoly flag carrier, too), and that everyone should have been happy with things as they were.
Sure you might get some kind of long term benefit by causing a player or two to exit from that route, freeing up a tiny amount of extra passengers. But it won't be much, and there's too many hungry competitors sharing our routes for much of it to go to you, anyway. Not to mention that there's always a new player just around the corner.
And let's say you do pick up all these hypothetical extra passengers that are released into the market because someone folded. They (and a large percentage of your other passengers) can always be taken away from you by flooding the market with low price, high frequency fares... a never ending circle really, that can only end in 1 Euro fares if left to itself, or end in relative happiness if it's controlled now.
I'm not sure what the point of this was, but there you have it.
